Jeff Judy

Jeff's Thoughts - February 24, 2016

Is Your Credit Policy Problem-Driven?

Lately, I have had several requests from banks for help with their credit policies. Each one asked me review their entire policy manual and recommend revisions to make the policy more effective and efficient.

What it takes to improve credit policy, what sections need the most work, varies from institution to institution. But a major part of the revision effort across all these banks is making them more internally consistent.

Typically, the existing policy is a patchwork of different standards for similar transactions, and even differing formats that make it hard for users to find the information they need quickly.

Credit policies grow and grow, they rarely shrink. And they usually grow by the accretion of new pieces that are responses to specific problems.

That process does not produce a clear, understandable, easy-to-use consistent whole. Rather, the effect is somewhat like barnacles on the hull of a ship, added one at a time until you have a rough mess that slows you down.

When a problem arose with how something is done at these banks, they added or revised a section of policy. If they ran into problems with how credit officers were using appraisers for real estate related transactions, they plugged in a beefy appraisal section. When the next issue reared its ugly head, they applied another policy "bandage."

But each time they went into the policy, they used a microscope approach: focus on extreme detail, but a very narrow field of vision. They essentially wrote a stand-alone document and then just jammed it into the existing policy.

And eventually they ended up with a policy that led to more variability in how they did business and, ultimately, to new mistakes and new problems.

When your standards for similar credit decisions vary widely, credit officers have a hard time remembering which is which. They apply the wrong standards because there are too many "flavors" of credit procedures to keep straight.

And when they do go to the manual, they find that each section puts the information in a different order and uses headings and bullets differently. That makes it hard to compare information or find the details they need quickly.

How can this patchwork be avoided?

Create a standard format and organization for your manual, a template, that will always be used in any additions or revisions.

Invite feedback from front-line users about which sections of the policy are unclear or confusing.

At the very least, when adding or revising a section of policy, compare it to a similar section to help maintain internal consistency

Schedule regular review and updating of the entire credit policy.

The last point bears repeating. The task of maintaining a consistent credit policy, one that anticipates problems rather than just reacting to them, is mostly a matter of priority and commitment. Schedule regular policy reviews that look at the entire document, not just recent hot spots, and avoid the "barnacle approach" to guiding your credit staff.